The increase, decided at a meeting of the Empowered Group of Ministers headed by Finance Minister Pranab Mukherjee, is exclusive of local sales tax, Oil Minister S Jaipal Reddy told reporters here.
Diesel price in Delhi will be hiked by Rs 3.40 per litre to Rs 41.15 a litre with effect from midnight. Rates will vary at cities due to differential rates of VAT/sales tax.
Besides the price hike, the EGoM decided to abolish the 5 per cent customs or import duty on crude oil, and slashed the same on diesel and petrol by 2.5 per cent from 7.5 per cent.
Also, excise duty on diesel was cut from Rs 4.60 per litre to Rs 2 a litre.
Reddy described the hikes, which had become necessary in view of a rally in international crude oil price, as "very modest and minimal".
The decision to cut customs duty on petrol also meant that the Rs 1.98 per litre hike needed to level retail prices with their cost would no longer be required, he said.
The reduction in excise duty on diesel would lead to a revenue loss of Rs 23,000 crore this fiscal, while in the customs duty cut the government will forego Rs 26,000 crore.
The price hike would help the oil companies limit their revenue loss by Rs 21,000 crore, but they still would end the fiscal with about Rs 1,20,000 crore of revenue loss.
Oil Secretary G C Chaturvedi said the hike in price of diesel would add 0.3-0.4 per cent increase in inflation which is already hovering around 9 per cent, more than twice the rate in the US and almost four times of Germany`s.
A 14.2-kg domestic LPG cylinder now costs Rs Rs 345.35, while kerosene is priced at Rs 12.32 per litre in Delhi.
Asked about the political fallout of the hike, Reddy said, "Political problem will always be there. Economic problem will not wait for solution to political crisis."
Despite a steep hike of Rs 50 per cylinder in LPG rates, which equals Rs 50.55 increase by the then NDA government led by Atal Bihari Vajpayee government in March, 2000, domestic cooking gas will still be cheaper compared to that in the neighbouring countries.
LPG in Pakistan costs Rs 611.40 per cylinder, Rs 484 in Bangladesh, Rs 878.90 in Sri Lanka and Rs 821 in Nepal.
Similarly, the Rs 2 per litre hike in kerosene price, which comes on the back of last year`s Rs 3 per litre raise, would raise rates in Delhi to Rs 14.32 per litre, still cheaper than Rs 43.95 in Pakistan, Rs 27.81 in Bangladesh, Rs 25.12 in Sri Lanka and Rs 42.61 of Nepal.
"I am sandwiched between economist on the one hand and populist on the other. Economist will say why only Rs 2 per litre increase in kerosene, while the populist will say why did you increase by even Rs 2 per litre," Reddy said.
"Consumers can easily absorb the hikes announced today."
Asked how he managed to convince the finance ministry to forego revenues in a difficult year, he said, "I will not give you a glimpse into my kitchen. I will only serve the dishes."
"The only inflationary item is diesel. The hike is minimal," Reddy said, adding the basket of crude oil India buys has averaged USD 113 per barrel this quarter as against USD 75 per barrel at the time of last increase almost a year ago.
Today`s hike in diesel and LPG rates, the first in almost a year, comes on back of last month`s steep Rs 5 per litre increase in petrol price to Rs 63.37 per litre in Delhi.
The same EGoM had a year ago freed petrol price from government control and since then they have risen 23 per cent.
The current price of Rs 63.37 a litre in Delhi was short of its cost by Rs 1.98 per litre but the cut in customs duty has negated the required price increase, he said.
The increase in price of diesel, the most used fuel in the country, will stoke inflation. Diesel is the preferred fuel for transportation in the country and an increase in tis price will lead to increase in transportation cost of almost all commodities. It has a 4.7 per cent weight in the benchmark wholesale-price index and petrol 1.1 per cent.
State-owned fuel retailers were losing Rs 456 crore per day on selling diesel, domestic LPG and kerosene at government controlled rates before today`s decision.
Chaturvedi said oil firms were losing Rs 13.72 per litre on diesel and the price hike together with customs duty and excise duty cut would lower the revenue loss to Rs 6.22 per litre. Similarly, they were losing Rs 26.66 per litre on kerosene and Rs 381.14 on every 14.2-kg domestic LPG cylinder.
"There still will be under-recoveries (losses) even after the price hike and duty cuts," he said.
Reddy said before today`s decision, state oil firms were projected to lose Rs 1,71,140 crore. After today`s hike and duty cuts, they would still lose Rs 1,20,000 crore in 2011-12, which would have to be met through a combination of cash subsidy from the government and contribution from upstream firms like ONGC.
He, however, said there was no decision on how much will the government and the upstream firms contribute to this.
Diesel prices were last raised by Rs 2 per litre on June 26 last year. Domestic LPG rates on the same day went up by 35 per cylinder and kerosene by Rs 3 per litre.
During 2010-11, fuel retailers posted a combined revenue loss of Rs 78,189 crore on fuel sales. Of this, Rs 30,297 crore, or 38.75 per cent, was met by upstream oil producers like ONGC. The government gave a cash subsidy of Rs 41,001 crore or 52.44 per cent.
Mukherjee had provided Rs 23,640 crore towards fuel subsidies in the Budget for 2011-12, less than Rs 38,380 crore in the previous year.
"As the government has entirely eliminated the customs duty on crude oil, reduced the customs duty on products to the corresponding extent and drastically reduced the excise duty on diesel, it is hoped that the state governments would also reduce the state levies to a corresponding extent," Reddy added.